Nation Moves Closer to Recovery

For the country as a whole, the NAHB/First American Leadings Markets Index (LMI), released today, rose to .99 in the fourth quarter of 2016, .01 point higher than its level in the third quarter of 2016, .98, and .05 point higher than its level from one year ago, .94. The LMI is now .21 point above its low of .78 reached in March 2012. The index uses single-family housing permits, employment, and home prices to measure proximity to a normal economic and housing market. The index is calculated for both the entire country and for 337 local markets, metropolitan statistical areas (MSAs). A value of 1.0 means the market (or country) is back to the last level of normality.

However, as the country approaches 1.0, the underlying components are at different stages of recovery relative to a period prior to the boom years. As shown in the graph above, in 2002, the country was at 1.0 as each component was close to normal. However, at the end of 2016 when the overall LMI score reached .99, house prices are the only component considered recovered, at 1.47. On the other hand, employment is at .98, close to 1.0, while single-family permits are furthest from 1.0 at .52*.

Similarly, the recovery varies across the country. The number of areas considered normal now totals 174, accounting for more than half, 52 percent, of the 337 markets tracked. House prices have reached or now exceed their last normal period in 327 of the 337 markets tracked. However, permits have recovered in only a handful of markets, 66. The lagging single-family category partly reflects constraints faced by builders.

Previous analysis found that builders continue to report that cost/availability of labor and the cost/availability of lots remain significant problem faced in 2016. In addition, impact fees as well as environmental and bank regulations also pose challenges to builders. Labor shortages, lot shortages, as well as government regulation are all contributing to higher construction costs and widening the spread between prices of new and existing homes, which lowers the competitive position of new construction relative to existing homes.Encouragingly, the labor market in 108 metro areas is considered back to normal, 17 more than the number in the third quarter of 2016 and 46 more than the number of markets in the fourth quarter of 2015. The improvement in the labor market is consistent with FOMC’s belief that realized gains in the labor market contributed to their decision to raise its key interest rate in the December.

* Methodologically, Index components are calculated by taking the average permit, price or employment number for the past year and dividing it by its annual average over the last period of normal growth. For single-family permits and house prices, 2000-2003 is used as the last normal period, and for employment, the year before the beginning of the Great Recession in 2007. Permits and employment are divided by population in the current and normal period to account for growth that did take place. The three components are averaged to provide a score for each market.